Fundamental Forecast for the Japanese Yen: Neutral

The Japanese yen was nearly flat on the week against the dollar despite periods of volatility as early risk appetite was dampened by prevailing concerns over Europe. The People's Bank of China hold rates steady over the past weekend spark a broad bases greenback sell-off to start the week before the reserve currency regained its footing as re-emerging concerns over Europe fueled safe haven flows. Meanwhile, the Yen ended the week on a higher note against its European counterparts on the back of those same concerns. Meanwhile, Japanese fundamentals had very little impact on price action but warned of further weakness in the export driven economy which will put pressure on the BoJ to take further action at their upcoming policy meeting.

The central bank recently announced the details of its first round of asset purchases exchange-traded funds and real estate investment trusts. The plan is widely viewed as too small when compared to the $600 billion effort from the Fed, with pressure mounting on Japanese policy makers to take more aggressive action. It is unlikely that the BoJ will take any action to end the year with their initial plan just underway, but we could see Governor Shirakawa signal that more efforts are being debated and could come to fruition in early 2011. The prospect of more quantitative easing could weigh in the Asian currency, especially if broader trends take a back seat with the Holidays approaching.

A lack of participation from traders will most likely lead to a quiet week, given the USD/JPY current trend is safe to expect that the pair will remain confined to current patterns. However, if the European news cycle continues to stoke fears of a contagion, yen strength is favored against most majors outside other havens of safety like the dollar and Swiss franc.

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